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The best owners of an investment bank could well be its employees. This stunning statement of the bleeding obvious comes not from a regulator or a management guru but from Knight Vinke. The U.S. fund manager has turned its sights on UBS, publishing an open letter to the shareholders, board and staff of the Swiss bank, asking that it stop playing the markets and instead focus on the boring but safe business of managing money for Swiss people and wealthy foreigners.
Knight Vinke makes a living by being troublesome and asking awkward questions of company boards. It made its reputation by persuading Shell to end its dual Anglo-Dutch corporate structure and it told HSBC to cut its expensive cloth to suit leaner fashions. Both corporate giants complied. Since the financial crash, there has been a lot of talk among regulators about the systemic risk posed by the investment banking activities of large deposit-taking retail lenders. Few, however, have pointed to the damaging disconnect within these institutions between the "masters of the universe" and the capital they play with.
Worse still, as Knight Vinke reveals, the disconnect is only in terms of employee liability. Since 1998, the staff of the investment banking division have earned 115-billion Swiss francs in salaries and bonuses, but these same people over the same period contributed a negative 25-billion Swiss francs to the group. For UBS investment bankers, turning up for work has been like betting on a roulette wheel that only lands on black for 15 years. Knight Vinke's modest suggestion is that transferring ownership of the investment bank to its staff would lead to more prudent behaviour. Episodes of imprudence at UBS are many, including 57-billion Swiss francs lost in the financial crash, the $2-billion (U.S.) loss incurred in 2011 by Kweku Adoboli, the rogue trader and a massive fine for the part played by UBS in the Libor rigging scandal.
UBS demurs, pointing to extensive reforms and upheaval that have led recently to 10,000 layoffs. UBS could argue that other banks have suffered similarly but that is surely the point: investment banking is a high-risk, high cost activity best played by principals. It should not be assigned to agents and certainly not humdrum employees whose biggest potential liability (apart from jail) is the loss of a cushy job.
Almost three decades ago, before the Big Bang financial reforms in London – when American and European retail banks took over such activities – the business of securities dealing and advising companies on capital-raising was conducted by stockbrokers and merchant banks, which were mainly owned by the people who worked there. If the partners made a very bad bet at work, their homes were at risk. It was a good discipline.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.
Carl Mortished